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Unit 8: Financial Institutions

Notes

Task Enumerate the various controls which have been imposed on the NBFCs in India.

8.6 Introduction to Development Banks

Development banking is the financing of projects assessed on the basis of their viability to
generate cash flows to meet the interest and repayment obligation. They have an in-built
promotional aspect, because projects have to fall within the overall national industrial priorities,
located preferably in backward areas and promoted by entrepreneurs.

8.6.1 Nature of Development Banking

In the late forties, right after the Second World War there was a paradigm shift in the approach to
lending for industrial projects from security for the loan to income or cash flow from the project.
This required a new set of institutions providing finance on a medium and long-term basis from
5 to 7 or even 10 years. Their approach to appraisal had to take into account the time value of
money, which involved the use of discounted cash flow techniques. The projects represented
income streams and their viability was assessed on that basis and not on the basis of any security
provided for the loan. Until the emergence of a vibrant capital market in the 90s, development
banks for almost four decades played a vital role in promoting an industrial structure conforming
to national priorities, located in backward areas and encouraging entrepreneurs.

8.6.2 Development Banks in India

Asian Development Bank India Resident Mission (ADBINRM) - Provides information about
ADB and India partners in development, INRM's newsletter, project activities in India, business
opportunities, and more.

Development Credit Bank Limited

1. Economic Development Corporation of Goa, Daman, and Diu Ltd (EDC) – Development
bank set up by the government of Goa whose objective is to promote industrial investment
in the state.
2. Industrial Financial Corporation of India – A development finance institute.

3. Small Industries Development Bank of India – Provides financing and development of
industry in the small scale sector.

An Overview of Development Banking in India

The concept of development banking rose only after Second World War, successive of the Great
Depression in 1930s. The demand for reconstruction funds for the affected nations compelled in
setting up a worldwide institution for reconstructions. As a result the IBRD was set up in 1945 as
a worldwide institution for development and reconstruction. This concept has been widened all
over the world and resulted in setting up of large number of banks around the world which
coordinating the developmental activities of different nations with different objectives among
the world. The Narashimam committee had recommended to give up its direct financing functions
and to perform only the promotional and refinancing role. However it is the S. H. Khan committee
appointed by RBI that has recommended to transform the Development Bank (development
finance institution) into universal banking institutions.

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